Finance basics How to forecast growth?

If you wish to be mighty, you should rise more often than you fall. But falling is something you cannot avoid. In business, you must make projections in order to forecast the falls and find ways to rise.

In the three-part series, we learnt to how to forecast expenses and then how to forecast revenues.

After you have done these projections, you will have a clear idea of how you are growing and at what rate. But how to make growth projections. Here’s how:

Cross-check key ratios along with your projections

You learnt how to make aggressive revenue forecasts but that would also tempt you to overlook expenses. Don’t make that mistake. It’s convenient to assume that the expenses can be adjusted to accommodate real-time finances even if the revenue doesn’t really come as expected. You need to grow sales but you also need to pay your bills. So how do you reconcile both revenue and expense projections? By identifying key ratios. Here are some key ratios to consider:

Your gross margin

Find out the ratio of total direct costs to total revenue during a given year or quarter. You will typically find your aggressive assumptions looking unrealistic. But avoid assumptions that make your gross margin increase from 10 to 50 percent. If your expenses on customer service and direct sales are high now, they will only go up in the time to come.

Your operating profit margin

Now find out the ratio of total operating costs-direct costs and overheard, excluding financing costs-to total revenue during a given period. Ideally you should have positive movement with this ratio. When your revenues grow, overhead costs should be a small proportion of total costs and your operating profit margin should become better. Don’t make the mistake of forecasting this break-even point too early and assuming you won’t need much financing to reach this point.

Get total headcount per client

This is especially essential if you are a sole proprietor and wish to grow the business on your own. Divide the number of employees at your company-which will be only one in case of your sole proprietorship-by the total number of clients you have. Now would you want to be managing all these accounts in five years as well? If not, do revisit your assumptions about revenue or payroll expenses or both.

Accuracy in growth projections is a matter of consistency. You need to continually make these projections to get better. Business planning and projections prepare your for unforeseen expenses in future.

A vital step towards getting quicker growth projections would be invest in a good cloud-based accounting software. We have got a customized accounting solution for you. Do give us a call.